Pinsent Masons advises on L Catterton’s sale of Sweaty Betty to Wolverine World Wide Inc
Out-Law Guide | 11 Sep 2018 | 4:02 pm | 7 min. read
This guide was last updated in September 2018
A transaction can fall within the scope of the UK merger control rules if it does not fall within the exclusive jurisdiction of the European Commission under the EU Merger Regulation.
The CMA has jurisdiction to review mergers for potential competition concerns where the annual UK turnover of the target business exceeds £70 million or where the transaction creates or strengthens a combined share of supply of goods or services of 25% in the UK or in a substantial part of the UK. Note that lower UK thresholds now apply to transactions impacting certain sectors related to national security (see further below).
The CMA's substantive analysis of mergers continues to focus on its assessment of economic and factual evidence based on theories of harm, which provide the CMA with a framework for assessing the effects of a merger, and in particular whether or not it could lead to a substantial lessening of competition. The CMA assesses the closeness of competition between the parties, possible changes arising from the merger, the nature and extent of competitive constraints, and any impact on rivalry and expected harm to customers, as compared with the situation likely to arise absent the merger (referred to as the counterfactual).
The UK merger control regime remains voluntary in theory, however for transactions which fall under its jurisdiction, the CMA has strong regulatory powers, including the ability to suspend or even reverse integration between the merging parties in relation to completed transactions, the ability to prevent transactions from completing, and ultimately the power to block a merger or requiring the divestment of certain businesses or imposing behavioural undertakings. Breach of these prohibitions can result in fines of up to 5% of group turnover.
The CMA has additional administrative powers to require merging parties and third parties including suppliers, customers and competitors to provide data and documents in a particular format and timescale at Phase I, and also during an in-depth Phase II merger investigation. If the CMA’s requirements are not met in full, or if inaccurate data are provided, the CMA can impose fines on a daily or one-off basis.
The increasing regulatory burden of UK merger control
The total number of cases reviewed by the CMA is broadly consistent since its creation in 2014, with 60-70 cases each year. In 2017/18, there was a trend for around half of all cases reviewed by the CMA to raise material competition concerns, with this proportion requiring a case review meeting at phase 1. This shows that the CMA focusses on cases which raise substantive concerns (identified with the assistance of its dedicated 'Mergers Intelligence Committee'), rather than reviewing cases which do not.
Extended periods for pre-notification discussions continue to be a feature of the UK merger control process. The CMA expects parties to make contact at least a couple of weeks before the intended formal notification date, but this period tends to be far longer (in some cases, six weeks or more), especially for more complex and/or data-heavy transactions. The CMA noted in 2018 that pre-notification discussions generally last an average of around 30-35 working days, with a phase 1 investigation lasting on average, a further 35 working days (five days faster than the 40-working-day statutory maximum).
Each transaction is different and will raise its own specific issues. It is therefore essential that you contact your competition law advisors at the earliest possible stage of a proposed transaction to discuss whether it is likely to qualify under the merger control rules, the risks of not proactively notifying it to the CMA and the options open to your business for managing these risks.
It is also essential to bear in mind that, although the UK has adopted a voluntary merger notification system, most jurisdictions around the world have adopted a mandatory merger notification system which generally means that completion must be suspended until clearance from the relevant competition authorities has been obtained. National competition authorities outside the UK are increasingly aggressive in fining companies that have failed to pre-notify transactions that are subject to mandatory notification obligations.
The increasing importance of internal documents in merger assessment
The process of notifying mergers to the CMA has become increasingly onerous as the CMA becomes more prescriptive about the type and quantity of data and documents that must be provided with any merger notification. This has become a particular area of focus for the CMA, and in 2018 it launched a consultation on a proposed new approach where it is likely to formally request internal documents, including emails, internal analyses and even handwritten notes and messaging chats, dating back up to three years to verify the parties' analysis of the merger.
This approach follows the CMA's fine of £20,000 imposed on Hungryhouse in November 2017. This was the first case where the CMA issued a procedural fine, in this case, a fine below the statutory maximum of £30,000. Hungryhouse had failed to adequately respond to a formal information request, including the non-disclosure of documents and emails regarding Hungryhouse's internal evaluation of the merger, during the phase 2 review of the acquisition of Hungryhouse by its competitor, Just Eat.
As a result, a business should be aware at an early stage that any internal documentation produced, including emails, and any non-legally privileged documentation prepared by advisors in relation to a possible merger, may need to be disclosed when notifying a transaction to the CMA. The CMA's fining decision emphasised the importance of understanding the scope of an information request from the CMA as soon as it is received, putting in place proper procedures to respond to information requests (including understanding that any searches conducted must be sufficiently broad to capture all responsive documents), and ensuring there is adequate staffing within the organisation to manage the request.
The CMA's powers to 'Hold Separate' merging parties
While completing a transaction without obtaining clearance is still an option in the UK, there is a materially increased risk of Hold Separate Orders being imposed by the CMA on merging parties in such circumstances. These prevent the parties from further integrating an acquired business and last for the duration of the investigation.
The CMA is increasingly monitoring compliance with Hold Separate Orders, and imposed its first fine of £100,000 in 2018 for the breach of an order. The CMA found that Electro Rent had breached the order by terminating the lease of the only premises that Electro Rent had in the UK, contrary to the requirements of the order.
As hold separates will almost always be imposed whilst the CMA inquires about or investigates a merger (in particular as regards completed transactions), a business must consider the implications of a hold separate order being imposed, in particular given the CMA's recent focus in this area. Any transaction planning should therefore take account of the possibility that the CMA may prevent completion from occurring, and prevent the target business from disclosing to the purchaser any confidential information about its operations, until after the CMA has decided the case.
National security interventions
The government has long had the power to intervene in mergers on various public interest grounds, namely, maintaining national security, media plurality and, since the 2008 financial crisis, the stability of the UK financial system. New legislation which came into force on 11 June 2018, has bolstered the government's powers to intervene in mergers on grounds of national security by lowering the £70 million turnover threshold to £1 million where the target is active in one of three specified sectors: (i) the development or production of items for military or military and civilian use; (ii) quantum technology; or (iii) computer processing units. The 'share of supply' test is also amended so that the test is met if the target alone has a share of supply in these sectors of 25% (i.e. even if share of supply or acquisition does not increase as a result of the merger).
These amendments were an interim step by the government in its wider plans to create a separate national security regime which will operate alongside the current merger regime. The government is currently consulting on proposals to review transactions which may raise national security concerns. Under the proposals, ministers would have the power to intervene across all sectors (although it has indicated that intervention will be more likely in certain 'core areas') in a wide variety of transactions including the acquisition of businesses and assets such as land, intellectual property and contractual rights. The proposed national security regime will remain voluntary, however, parties who do not notify such transactions to government will run the risk that a senior minister may intervene and impose conditions to prevent or mitigate any risks to national security arising from the transaction including ultimately, by blocking or unwinding it.
The UK government is yet to provide clarity on how the UK competition regime will change as a result of the UK’s vote to leave the EU. At the current time, it appears that the UK’s aim of seeking a ‘transitional agreement’ until the end of 2020 will result in the current merger control system not changing until the end of that period (with transactions falling under the jurisdiction of the European Union Merger Regulation (EUMR) continuing to be reviewed by the European Commission). If a 'no deal' scenario does occur however, there is a large degree of uncertainty as to how the jurisdiction of UK merger control will apply after 29 March 2019. In any event, it does not appear that Brexit will lead to a change to the substantive UK merger control rules.
The CMA recently received an increase in its budget of £2.8m, and then a further £23.6m for the 2018/19 financial year and for subsequent years, to enable it to take on more cases and in anticipation of a likely larger workload following Brexit (the CMA has estimated that the change will lead to up to 70 additional merger cases a year, which would be a more than 100% increase on its current workload). Any move to take the UK outside of the scope of the EUMR is likely to lead to increased burdens on business, as some transactions would require separate merger filings in the UK in addition to Brussels under the EU regime. The CMA itself (in its 2017/18 report) has recognised that it ‘may need to alter the priorities it sets’ as a result of the evolving Brexit environment, and that the exact bearing it has on the CMA’s work is dependent on ‘the exit negotiations and the terms of the future relationship with the EU’.
Pinsent Masons advises on L Catterton’s sale of Sweaty Betty to Wolverine World Wide Inc